The Effects of Employment Protection Legislation

This paper investigates the effects of employment protection legislation on the rates of worker flows, job reallocation, and churning flows by examining the case of Taiwan. Our study’s empirical identification takes advantage of the natural experiment created by Taiwan’s enactment of Labor Standards Law, which substantially increases the costs of firing an employee, in 1984 and the subsequent measures of the law’s enforcement. Moreover, our identification also exploits the fact that in Taiwan the stringency of Labor Standards Law’s provisions and the intensity of the law’s enforcement vary with establishment size. Our analysis is based on monthly data at the establishment level for the period 1983–1995. We find that Taiwan’s Labor Standards Law and its enforcement measures dampen worker and job turnover rates for medium-sized and large establishments, and the dampening effects vary with establishment size.